12.1 Analysis of innovative business models addressing poverty
4 min read•july 30, 2024
Innovative business models addressing poverty are crucial for effective poverty alleviation. These models focus on understanding low-income customers, reaching underserved markets, and creating scalable solutions that generate both social and economic impact.
Successful ventures tailor products to poor communities, build efficient distribution channels, and incorporate . They measure economic and social outcomes rigorously, while navigating challenges like limited infrastructure and regulatory barriers in low-income markets.
Business Models for Poverty Alleviation
Understanding Low-Income Customers
Top images from around the web for Understanding Low-Income Customers
TAO/Handbook/Business Models - Wikiversity View original
Is this image relevant?
4.21: Putting It Together- Marketing Strategy - Business LibreTexts View original
Is this image relevant?
Frontiers | A coupled and coordinated analysis in livelihoods of poverty alleviation migrants ... View original
Is this image relevant?
TAO/Handbook/Business Models - Wikiversity View original
Is this image relevant?
4.21: Putting It Together- Marketing Strategy - Business LibreTexts View original
Is this image relevant?
1 of 3
Top images from around the web for Understanding Low-Income Customers
TAO/Handbook/Business Models - Wikiversity View original
Is this image relevant?
4.21: Putting It Together- Marketing Strategy - Business LibreTexts View original
Is this image relevant?
Frontiers | A coupled and coordinated analysis in livelihoods of poverty alleviation migrants ... View original
Is this image relevant?
TAO/Handbook/Business Models - Wikiversity View original
Is this image relevant?
4.21: Putting It Together- Marketing Strategy - Business LibreTexts View original
Is this image relevant?
1 of 3
- Successful business models focused on poverty alleviation incorporate a deep understanding of the needs, behaviors and constraints of the target low-income customer segment
- Requires extensive market research and direct engagement with poor communities
- Effective models involve developing affordable, high-quality products and services tailored to the unique circumstances of those living in poverty
- Single-serve packaging, pay-per-use pricing, or leveraging existing community assets are examples of tailored approaches
Reaching Underserved Markets
- Building efficient, low-cost distribution channels to reach remote or underserved areas is critical
- Strategies include piggybacking on existing networks, franchising, or partnering with local organizations
- Innovative approaches make products and services more affordable for low-income consumers
- Factoring, , or progressive pricing based on ability to pay are examples of affordability strategies
- Successful ventures frequently incorporate capacity building and income generation for the poor into their business models
- Employing low-income people as distributors, sales agents or suppliers builds skills and income
- Partnering with governments, NGOs, and other ecosystem players can be important to gaining knowledge, building legitimacy, accessing support services, and scaling impact
Scalability of Poverty-Focused Ventures
Assessing Scalability Factors
- Analyzing factors such as the size of the potential market, level of unmet demand, the venture's cost structure and unit economics, and availability of human and financial resources for expansion helps assess
- The replicability of a model depends on how easily it can be adapted to new geographic or cultural contexts while still maintaining its core value proposition and impact
- More standardized, "plug and play" models () are generally easier to replicate than highly customized approaches
- Reaching significant scale often necessitates accessing commercial capital markets
- The business must demonstrate a financially-sustainable model and competitive returns to attract investors
Enabling Scalability Through Systems and Technology
- Scaling a high-touch, decentralized model requires strong systems, processes and training to ensure quality and consistency across locations
- Overly complex models with many moving parts are difficult to scale effectively
- Technology, such as or mobile communications, can be an important enabler for achieving scale
- Reduces transaction costs, facilitates information sharing and enables network effects
- Determining the optimal organizational structure (for-profit, non-profit, hybrid) and governance model is important for balancing sometimes competing priorities of social impact and financial at scale
Impact of Poverty Alleviation Models
Measuring Economic and Social Outcomes
- Assessing impact requires defining clear social and economic outcome metrics, putting in place systems to regularly measure and track those metrics, and comparing results to the counterfactual of what would have happened without the intervention
- Economic impact can be measured through indicators such as:
- Increased incomes
- Improved productivity
- Expanded market access
- Job creation
- New business formation
- Key social impact metrics often include improvements in:
- Health
- Education
- Gender equality
- Food security
- Housing
- Other quality of life measures
Rigorous Impact Evaluation Approaches
- Impact investors increasingly use standardized frameworks like to assess, report and compare the social and environmental performance of companies and funds
- are considered the gold standard for rigorously evaluating the attributable impact of an intervention
- Compares results against a randomly selected control group
- Costly and not always feasible to implement
- Potential negative impacts of a market-based approach must also be considered
- Risk of exacerbating inequalities, eroding social capital, or creating dependencies on external resources
Challenges in Low-Income Markets
Access to Capital and Infrastructure
- Enterprises serving low-income customers often struggle to access appropriate forms of capital
- Smaller scale, higher risks, longer time horizons and limited exit options associated with these markets
- "Pioneer gaps" exist for seed funding and patient growth capital
- Weak and underdeveloped infrastructure in many low-income communities creates operational challenges and increases costs
- Lack of roads, electricity, storage and communications are common infrastructure gaps
Consumer Constraints and Regulatory Barriers
- Low-income consumers have limited and volatile cash flows, low literacy levels, and a lack of access to credit, making it difficult to sell to them through conventional means
- Building awareness and trust with low-income customers is challenging
- Regulatory and policy environments are frequently inhibiting for businesses
- Bureaucratic red tape, corruption, lack of transparency and sudden policy changes create obstacles
- Human capital constraints are common, with a scarcity of skilled talent and a "brain drain" of educated workers to urban areas or abroad
- Investing in training is costly and it is hard to retain talent in these contexts
- Measuring true impact in data-poor environments with many compounding factors is methodologically difficult
- The link between outputs and outcomes is not always clear
Key Terms to Review (22)
Ashoka: Ashoka was an ancient Indian emperor of the Maurya Dynasty who ruled from 268 to 232 BCE and is known for his role in spreading Buddhism and promoting social welfare. He is often seen as a pivotal figure in the context of social entrepreneurship due to his innovative approach to governance and his emphasis on ethical leadership, which resonate with contemporary efforts to address global poverty through sustainable social enterprises.
B Corporation: A B Corporation, or Benefit Corporation, is a type of business entity that prioritizes social and environmental goals alongside profit. These companies are legally required to consider the impact of their decisions on various stakeholders, including employees, communities, and the environment, making them distinct from traditional corporations that focus primarily on maximizing shareholder value. B Corporations embody a commitment to accountability and transparency, often attracting consumers who are concerned about sustainability and social responsibility.
Bottom of the pyramid: The bottom of the pyramid refers to the largest, but poorest socio-economic group in society, typically characterized by individuals living on less than $2.50 a day. This group represents a significant market opportunity for businesses seeking to develop inclusive business models that not only generate profit but also create value for underserved communities, promoting economic growth and social impact.
Capacity Building: Capacity building refers to the process of developing and enhancing the skills, abilities, and resources of individuals, organizations, and communities to effectively manage challenges and achieve goals. This concept is essential for fostering sustainable development, particularly in low-income areas, where strengthening local capacities can lead to long-term solutions for poverty alleviation.
Co-creation: Co-creation is a collaborative approach where businesses and stakeholders, including customers and communities, work together to develop products, services, or solutions. This method emphasizes the involvement of end-users and communities in the design process, leading to more relevant and impactful offerings, especially in addressing needs within underserved markets.
Community Engagement: Community engagement refers to the process of involving individuals, groups, and organizations in collaborative efforts to address issues that impact their community. This concept emphasizes building relationships, fostering participation, and creating a sense of ownership among community members, which is crucial for sustainable development and positive social change.
Digital payments: Digital payments refer to the electronic transfer of money for goods and services through digital platforms, eliminating the need for physical cash. This method enhances convenience, security, and speed of transactions, making it easier for people, especially in underserved areas, to engage in economic activities. Digital payments can take various forms, including mobile wallets, online banking, and cryptocurrency transactions, which are particularly relevant in addressing poverty by increasing financial inclusion and supporting innovative business models.
Frugal Innovation: Frugal innovation refers to the process of creating high-quality, affordable solutions tailored to the needs of resource-constrained consumers, particularly in developing markets. This approach emphasizes simplicity, cost-effectiveness, and sustainability while maximizing value from limited resources. Frugal innovation plays a crucial role in addressing global poverty by enabling access to essential goods and services for low-income communities.
Impact Investing: Impact investing refers to investments made with the intention to generate positive social and environmental impact alongside financial returns. This approach connects capital to businesses and initiatives that address societal challenges, aligning the goals of investors with those of entrepreneurs working to alleviate poverty and create sustainable solutions.
Inclusive Business: Inclusive business refers to business models that intentionally include low-income individuals as suppliers, distributors, or customers in order to create economic opportunities and improve their lives. This approach recognizes that engaging marginalized communities is not only a social responsibility but also a means to drive innovation and growth within emerging markets.
Iris+: iris+ is a comprehensive impact measurement framework designed to evaluate the social, environmental, and economic outcomes of businesses operating in low-income markets. It provides a standardized approach to assess how well innovative business models address poverty by measuring their impact on the communities they serve and promoting accountability among social enterprises.
Microfinance: Microfinance is a financial service that provides small loans and financial assistance to low-income individuals or groups who typically lack access to traditional banking services. This approach aims to empower marginalized communities, stimulate entrepreneurship, and promote sustainable economic development by enabling individuals to start or grow small businesses.
Microfranchising: Microfranchising is a business model that allows small-scale entrepreneurs to operate a franchise of a larger brand, often targeting low-income markets. It connects established companies with local entrepreneurs, enabling them to deliver goods and services that meet the needs of underserved populations. This model not only promotes entrepreneurship but also helps create jobs and stimulate economic growth in impoverished areas.
Muhammad Yunus: Muhammad Yunus is a Bangladeshi social entrepreneur and economist, widely recognized for pioneering the concept of microfinance and establishing the Grameen Bank. His work focuses on providing small loans to impoverished individuals, particularly women, enabling them to start their own businesses and escape poverty. Yunus's approach blends social impact with entrepreneurial principles, making him a key figure in discussions about poverty alleviation and social entrepreneurship.
Public-private partnerships: Public-private partnerships (PPPs) are collaborative agreements between government entities and private sector organizations aimed at delivering public services or infrastructure. These partnerships leverage the strengths of both sectors, where the public sector provides regulatory frameworks and funding, while the private sector brings efficiency, innovation, and expertise in execution.
Randomized Controlled Trials (RCTs): Randomized controlled trials (RCTs) are experimental studies designed to evaluate the effectiveness of an intervention by randomly assigning participants to either the treatment group or the control group. This method helps to minimize biases and confounding variables, providing robust evidence about the impact of interventions, particularly in understanding how innovative business models can address poverty and improve social outcomes.
Scalability: Scalability refers to the ability of a business or organization to grow and manage increased demand without compromising performance or losing revenue potential. In the context of addressing global poverty, scalability is crucial for social enterprises to expand their reach and impact, particularly in low-income markets where challenges and opportunities exist.
Shared value: Shared value is a business concept that emphasizes creating economic value in a way that also creates value for society by addressing its challenges. This approach allows companies to enhance their competitive advantage while contributing to social progress, leading to benefits for both the business and the communities they operate in.
Social enterprise: A social enterprise is a business model that prioritizes social, cultural, or environmental goals alongside the pursuit of profit. These organizations operate in a way that seeks to generate positive change while being financially sustainable, bridging the gap between traditional non-profits and for-profit businesses.
Social Return on Investment (SROI): Social Return on Investment (SROI) is a framework for measuring and accounting for the social, environmental, and economic value created by an organization, relative to the resources invested. It connects financial returns to social impact, helping organizations understand how their efforts contribute to broader societal goals and the well-being of communities.
Sustainability: Sustainability refers to the ability to meet present needs without compromising the ability of future generations to meet their own needs. It emphasizes a balance between economic growth, environmental stewardship, and social equity, ensuring that resources are managed in a way that promotes long-term health and stability for both people and the planet.
Value Chain: A value chain is a set of activities that a company performs to deliver a valuable product or service to the market. It includes everything from raw material sourcing to production, marketing, sales, and distribution. The goal of analyzing the value chain is to identify ways to create more value for customers, reduce costs, and enhance competitive advantage, especially in the context of addressing global challenges such as food security and poverty alleviation.